Vodafone lifts FTSE in best start to year since 1989

The London Stock Exchange is seen during ther morning rush hour in the City of London April 11, 2011.

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A worker shelters from the rain as he passes the London Stock Exchange in the City of London at lunchtime October 1, 2008.

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A trader monitors the screen on a trading floor in London January 22, 2010.

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LONDON (Reuters) - The FTSE 100 rallied on Thursday, outperforming its global peers and extending its best start to the year since 1989, boosted by strong global economic data and deal chatter for heavyweight Vodafone.

The FTSE 100 surged 62.27 points, or 1.1 percent, to 6,264.91 points, a level not seen since May 2008, taking its gains since the start of the year to 6.2 percent, equal to its yearly gain in 2012.

Buying momentum on the FTSE has been building since the index climbed above its 2011 high at 6,100 earlier this week, pushing investors who were selling UK shares short to close their positions.

Short sellers borrow securities with a view to selling them and buying them back at a lower price before returning them to the lender.

"Since the FTSE went above 6,100 there has been a lot of short covering," a senior trader said.

"Plus you get the move out fixed income into equities, a serious attempt for once."

Recent fundflows data showed investors were piling into shares as yields on sovereign bonds were dampened by central banks' debt purchases and concerns about a euro zone break-up receded.

The yield on UK shares is 9.8 percent higher than that offered by Britain's 10-year government bond, Thomson Reuters Datastream data shows, meaning UK stocks offered a higher risk premium than its euro zone and U.S. peers.

The FTSE 100 has outpaced a 5 percent rise for the U.S. S&P 500 and a 3.3 percent rise for the Euro STOXX 50 since the start of this year.

Vodafone was the single biggest contributor to the FTSE on Thursday, adding 10 index points as it rose 3.2 percent, its biggest daily rise since August, in volume one and half time its 90-day average.

Traders cited talk that Vodafone may sell its stake in Verizon Wireless to Verizon as the main reason behind the rally.

John Keith, a senior research associate at Sanford Bernstein, said this would be the ideal time for Vodafone to sell the assets, given Verizon Wireless's current high valuation.

But he cautioned Verizon was unlikely to make an offer any time soon.

"If you look at the trajectory where Vodafone is going, with European markets getting weaker, then perhaps it would make sense for Verizon to wait a little bit longer," Keith said.

"We don't expect a bid soon although there is likely to be a lot of noise around the idea."

The speculation was triggered by comments from widely-followed hedge fund manager David Einhorn, who said he has added to his Vodafone position, arguing that the market undervalues the "clearly quite valuable" stake in Verizon.

DATA FUELS RALLY

Stronger-than-expected data from the United States and top-metal consumer Chin also fuelled the FTSE rally on Thursday, boosting stocks that depend on economic activity, such as miners and construction material companies.

Building materials group CRH was the top FTSE gainer, up 5.3 percent to 1,314 pence, with a trader saying buyers piled into the stock after it broke its recent high at around 1,300 pence.

Manufacturing in China and the United States, the world's two largest economies, grew at the fastest pace in about two years in January, providing tentative signs that the world economy may be gaining traction after a sluggish 2012.

Fredrik Nerbrand, global head of asset allocation at HSBC, said a string of recent, positive economic data out of China and the United States, as well as receding risks of a euro zone collapse, have led him to reduce the probability of below-trend global growth and inflation.

Accordingly, he has increased his allocation to equities, which provide exposure to economic growth and inflation through corporate earnings, and U.S. Treasuries, an inflation hedge, while cutting safe haven gold and more expensive corporate credit.